IOC in talks with BG, others to secure LNG supplies

State-run Indian Oil Corp (IOC) is in talks with BG Group, Qatar and Gazprom to secure long-term liquefied natural gas supplies for an import terminal it is building to feed its rising energy demand.

But while it talks to potential suppliers, the company is also keeping its options open to initially import LNG through spot or shorter-term contracts on expectations that India may lift price controls on the power and fertiliser sectors and allow them to pass on feedstock costs to consumers.

"It is not proper to assume that long-term contracts are the only way out," said AMK Sinha, director of business development, on the sidelines of an LNG conference.

"It may be prudent to see how the deregulation of the power and fertiliser sectors proceed."

Indian oil is building a 5 million tonne per year LNG terminal at Ennore in southern India, which is expected to come online by 2014.

Controls on what power and fertiliser companies charge consumers have hampered their ability to pay market prices for natural gas and other feedstocks.

To help partly offset costs, the government also caps the price of locally produced natural gas, currently at $4.2 per million British thermal units (mmBtu). It also controls who the gas can be sold to.

"India's ability to pay for imported LNG depends on how much the biggest consumers - power and fertiliser sectors - are willing to pay," said Sinha. "Their payment ability hinges how much they can pass on the costs to consumers."

Other consumers, such as petrochemical plants and refineries, can afford to pay more for gas, Sinha said. These customers are paying an average of $13-15 per mmBtu and sometimes as much as $16 per mmBtu for gas that is imported.

Asian spot LNG prices are currently around $16 per mmBtu.

"Who knows, we may get the terminal ready, buy spot and short-term cargoes and then look at a long-term contract," Sinha said, adding that the company is also waiting to see how supply dynamics change if the US starts to export LNG.

Asian buyers have been eagerly eyeing LNG exports from the United States, where a gas glut has depressed prices to around $2.20 per mmBtu, a fraction of Asian prices.

In December, state-run GAIL India signed a contract with Cheniere Energy for 3.5 mtpa of LNG for 20 years from its Sabine Pass plant starting in 2017.

Gas accounts for about 10% of India's primary energy basket versus the world average of 24%, and India's gas demand is expected to grow at 14% in the next five years.

India's LNG import capacity will reach 47.5 million tonne per annum in 2015-16 from 13.5 mtpa now.